iamnik77 (95.05)

Anyone like to hold both long and short positions in their real money portfolio?

1

Suppose I have a knack for picking stocks (both short and long positions) that outperform the S&P 500 by a sizable margin. And suppose that my portfolio has a 50/50 allocation to short and long positions. My short positions would consist of overpriced and hopeless companies and my long positions would consist of bargain priced companies with bright prospects. Of course, this portfolio would underperform a portfolio consisting only of my long positions in a bull market and underperform a portfolio consisting only of my short positions in a bear market. Do you think my 50/50 long/short portfolio would outperform an all long portfolio over a 20 year span? What about a 10 or a 5 year span? Thanks in advance for your input.

Do you think my 50/50 long/short portfolio would outperform an all long portfolio over a 20 year span?

No.

I say that having no knowledge of your investing acumen, strengths, weaknesses, etc, so this is more of a generalized prediction. In general, I think a 50/50 portfolio would underperform the market in most time periods. An exception might be one that was started in mid 2007 or right before the tech bubble burst in 2001.

I also agree with mustbepatient. It seems rare that you find investors who are good at playing both the long and short sides. I've proven myself to be very good at playing the long side over the past eight months or so, but my shorts have not fared nearly as well. I have a deep value mentality and I believe it's simply better suited to making money on the long side. All the same, I continue to try to improve my abilities on the short side, but I think I lack the mentality of a successful short seller.

It depends on market conditions. I would not want to be 50% short in a bull market no matter how good I was at picking bad companies. You would make more money by going 100% long.

In risky markets I think your 50/50 strategy would perform well. assuming your picks are correct. By the next bear market I hope to be better at picking bad stocks and try such a strategy myself. This time I just hedged with Puts.

My problem with shorting stocks is that by the time I figure out a company is in trouble they are already down almost 50%. Piling into a short position that late in the game is a good way to lose money.

If you want to see how a crowded short position can rip your friggin' face off, just look at the October chart of VLKAY.PK, also known as Volkswaggen. From $53 to $220 in 2 days. How would you like to have had a loss 3 times your initial position? If you ran out of margin your broker might have just closed the position for you at a 300% loss.

a long/short portfolio boils completely down to the managers ability to pick stocks that will perform better than other stocks.

The advantage is market neutrality. A significant long term disadvantage is the tendency for such a portfolio to yield zero dividends, as you are liable for dividends on your short positions. Shorting also comes with some costs.

Being short is inherently riskier than being long for reasons discussed above, and in general it comes with some fairly substantial expenses as well.

For the advantage of neutrality and not being subject to wild day to day market related swings, you take on quite a "headwind" (loss of divi's, expenses related to shorting).

A more efficient way to go short is via ETFs, but they come with their own set of flaws not the least of which is decay over time for many of them, meaning that its intrinsically disadvantaged to go long the things.

I am interested in market neutral strategies, but after a great many, 100's and 100's of hours of looking over various options related to these, I ultimately have to conclude that there are better ways to generate good returns without subjecting oneself to Mr. Markets various fits and spasms.

I don't play SHORT...... But....I do what Tom Gardner does in abandoning a stock in favor of another regardless if it's a loss or a profit when I sell/ditch the stock.

Take (F) Ford... I ditched it at $5.89. Look where it trades at now! I ditched Ford after taking a good look hard look at where I believed the share price SHOULD be trading at based on historic sales from April/May and Alan Mullaly's most recent comments.

It was clear to me that those thinking FORD should be $6 a share were pricing in Ford as if it would be profitable by the end of this year / beginning of next. Alan Mullaly came out and reaffirmed a 2011 target for profitability.

Who am I to argue against the C.E.O. of a company?

If I was a "SHORT SELLER" I would switched my LONG position to a Short at $5.89 in a heart beat and I'd keep pounding the sucker down to a $4 handle.

But..in short...I think Short Sellers need to simply do their research on the C.E.O's perspective of business + Sales + Profit Expectations. If all things look bleak to you then why not Short when the P/E is incredibly high? Who wouldn't want to short a Beverage company trading over a 25 P/E like (HANS) did at $40.00 a share?

I am long-short right now. I only lost .7% of my portfolio value today versus the 3.3% I would have lost on long positions only. I built up short positions on WOLF, IOC, SAH, CMRG, CLDA, PALM and GLG over the past few weeks, expecting the pullback which has begun. Addressing checklist's comment, none of those pay dividends. 2/3 of stocks don't pay dividends and even more of the financially weaker ones.

In my opinion timing is more critical than in going long. You don't want to hold a short for a year because you will be paying interest and you have unlimited risk.

Most hedge funds are about 130-30 long-short. 50-50 is not going to work well over the long term.

As far as Varchild's comment, ideally you want to short a company that is both highly overpriced and in short to long-term danger of bankruptcy. HANS has pretty much 0 bankruptcy risk. Your maximum reward shorting HANS is maybe 30% compared to 95% shorting a company like SAH.

Shorting stock at a 1 to 1 vs longing them is harder by nature, since stocks inherently appretiate. In other words, you'll find many more long oppurtunities than shorts just by the nature of the beast. I'd try more like a 75-25. Shorting is a hedge in a long portfolio not a 50-50, at least that's how hedge funds do it.

My answer is still "maybe" after all that. Don't take rule of thumb in this line of work...at least if you're under 35 and want to gamble. E.G. In my last blog post I show my portfolio that has done very well, but have almost no diversification. I feel like ive had a great year by not following rules.